How Discretionary Income Works

Discretionary income: It's what you have to spend, but don't need to spend.
Discretionary income: It's what you have to spend, but don't need to spend.

From unemployment rates and consumer confidence, to the price of eggs and the cost of a gallon of gas, economists track a wide variety of data in order to get an idea about the financial health of a country, state or city and the people who live in it. That includes keeping a close eye on income, the money people are bringing in for themselves and their families. Sometimes that data can be deceiving: The size of your paycheck doesn't tell economic observers a whole lot if they don't know how much of it immediately goes to things like rent or food. That's why they've come up with ways to calculate income so that it better represents how much money you actually have to spend or save.

In its simplest form, discretionary income is the money that you make that doesn't go to necessities. In other words, it's what — if anything — is left over after you cover the mortgage or rent, as well as food, clothes and medical bills. At least, that's the definition of discretionary income that's long been used by economists, businesses marketers and other folks who track these figures. The problem is that people have different ideas about what is and isn't a "necessity." You need to eat to avoid starvation, for example, but whether it's a Big Mac or a filet mignon that you order to quench hunger is a matter of personal choice [sources: Landefeld, Inc.].

Instead, economists tend to focus on what's left over after taking care of actual or perceived necessities in tracking disposable income. What they — and people who sell stuff like cars, electronics and entertainment — want to know is how much money people have that they can either save or put toward non-essential things like going to a movie or installing a new speaker system in their living rooms [source: Inc.].

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